Our Retaliation Needs to Be Smarter Than Trump

Published in the Financial Post.

Even before the end of his 30-day reprieve for tariffs on all Canadian exports to the United States, Donald Trump now threatens tariffs on all US imports of steel and aluminum. This erratic belligerence naturally tilts Canadians toward retaliation. Many are also talking about COVID-scale bailouts for those affected. But imitating Trump’s destructive tariffs will cost us — especially if it tips us towards another pandemic-style fiscal binge. We have to be smarter than that.

On trade, we need to heed what we ourselves are telling anyone in the United States who will listen. Tariffs hurt the country that imposes them. They are a tax on the people who buy the imported goods. Some of those buyers are final consumers, who naturally pay more for tariffed goods. In a modern economy, more buyers are producers of other goods and services who are buying imported inputs. Tariffs make those inputs more expensive, which makes those producers less competitive at home and abroad. US tariffs will raise the cost of US products, from cars to toilet paper to digital services. Tit-for-tat retaliation will do the same to us.

We should also stop talking about responding to US protectionism the way we responded to COVID. In retrospect, the fiscal response to the pandemic was way overdone. It boosted demand so much that inflation spiked. It hurt supply so much that per capita GDP has stagnated since. The federal government’s interest-bearing debt is an eye-popping $670 billion higher than pre-COVID — a burden Canadian taxpayers will bear for decades. Besides, US protectionism is nothing like a pandemic. It is less acute. But it is also more chronic. We need responses we can live with for a long time.

The smart responses are less exciting than hitting back and spending big, but they are the responses that will make us economically stronger. Easier movement of goods, services, people and capital among provinces will lower our cost of living and make us more productive. More openness towards other countries will do the same — and help diversify our trade. Less burdensome and uncertain regulations will spur investment and attract talent. So will cutting our most damaging taxes.

Staying calm would help us acquiesce to such US demands as dismantling the dairy cartel and allowing more foreign competition in financial services, telecommunications and transportation. Such reforms would boost our productivity and our buying power. We should be calm, too, about our exchange rate, letting it cushion US actions and move to whatever level makes us competitive at home and abroad.

Retaliation clearly has its place. Tariffs narrowly focused on hurting producers in politically influential regions may pressure Trump to ease up. So may boycotts of US goods by provincial monopoly retailers like the LCBO and other irritants Canada can devise, such as nuisance inspections at the border and fees on travellers. But retaliation that is big, broad and long-lasting will intensify domestic demands for COVID-scale fiscal relief, which could easily go beyond anything justified by US actions.

An amazing fact about Ottawa’s COVID response is that during the 2020-21 fiscal year – the first and worst year of the pandemic — only about five per cent of the surge in federal spending was health-care related. Most of the spending was transfers such as the CERB and wage subsidies — compensation for the lockdowns imposed by our own governments. Retaliatory tariffs will create an obligation to compensate. Adding tens — possibly hundreds — of billions more government debt will mean higher taxes in the future but do nothing to raise our productivity and living standards or make us less vulnerable to US trade aggression.

Trump makes us angry. US protectionism may feel like a plague. But misguided retaliation will deepen tariff-related damage and spark demand for COVID-scale bailouts. Our responses should make Canada stronger, more competitive and more prosperous. Tit-for-tat will cost us at the check-out, on our pay stubs and at tax time. We have to be smarter than that.

William Robson is President and CEO of the C.D. Howe Institute.